PROPERTY DAMAGE FROM RIOTS. WHO PAYS THE PRICE?
My college roommate Maryellen has clients in Manhattan. She stages events for them and handles marketing and advertising. She’s brilliant … an idea person who thinks of unusual ideas and also effectively implements them. I remember when we were in our mid-20’s, she created something so unusual and successful for The New York Post that she received a congratulatory phone call from Rupert Murdoch, the Post’s owner.
Maryellen sent me a video this week. Her friend had driven through Manhattan, recording the desolation and the boarded-up storefronts. She was distressed and outraged, as I’m sure many of us are.
Who pays for all that damage? Well, if you are a small business owner in Minneapolis, already struggling to survive the lockdowns, you probably already let your property & casualty insurance payments lapse while paying for rent and food. You don’t have any money left to get your business back up and running. You’re broke. However, if you are Tiffany’s or Saks Fifth Avenue in Manhattan, you will send the property damage bills to your insurance company.
I imagine that most P&C insurance companies will be receiving such bills from storeowners, corporations and citizens all across the land. People will need to repair and replace cars, homes, storefronts, buildings and merchandise.
From an investor’s point of view, I will be cautious about owning P&C insurance stocks. We won’t know the cost of all the damage until second and third quarter earnings reports, but you can be sure that profits will suffer. Stocks will react by falling. And I don’t mean to alarm anybody, but we’re just weeks away from hurricane season, and 2020 has already been sort of a bad luck year.
Due to the unfortunate and expensive social upheaval that we’ve experienced, I’m selling Mercury General Group (MCY), a P&C insurance company, from the Buy Low Opportunities Portfolio today. Those of you who are somewhat enterprising might consider buying puts on various P&C insurance stocks before their bad fortune pervades news reports.
Share prices reflect Monday (June 8) closing prices. Send questions and comments to Crista@CabotWealth.com.
Be sure to review the Bulletin from June 8 in which I mentioned news, rating changes and/or price action on Baker Hughes (BKR), Broadcom (AVGO), Dow Inc. (DOW), Marathon Petroleum (MPC), MKS Instruments (MKSI), NV5 Global (NVEE), Quanta Services (PWR), Total SA (TOT), VanEck Vectors Oil Refiners ETF (CRAK) and Voya Financial (VOYA).
QUARTERLY EARNINGS RELEASE CALENDAR
June 11 pm: Adobe Systems (ADBE) – 2Q
TODAY’S PORTFOLIO CHANGES
General Motors (GM) moves from Strong Buy to Hold.
Mercury General Group (MCY) moves from Buy to Sell.
Tyson Foods (TSN) moves from Strong Buy to Buy.
LAST WEEK’S PORTFOLIO CHANGES (June 3-9)
Broadcom (AVGO) moved from Buy to Hold.
Dow Inc. (DOW) moved from Buy to Strong Buy, then back to Buy.
Marathon Petroleum (MPC) moved from Strong Buy to Buy.
MKS Instruments (MKSI) moved from Strong Buy to Hold.
NV5 Global (NVEE) moved from Strong Buy to Hold.
Quanta Services (PWR) moved from Hold to Buy, then back to Hold.
Total SA (TOT) moved from Strong Buy to Hold.
VanEck Vectors Oil Refiners ETF (CRAK) moved from Strong Buy to Buy.
Voya Financial (VOYA) moved from Strong Buy to Buy.
Marathon Petroleum (MPC 42.21 – yield 5.5%) is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, a majority interest in midstream company MPLX LP, 10,000 miles of oil pipelines, and product sales in 11,700 retail stores. Wall Street analysts are forecasting a 2020 full-year loss of ($2.15) per share, followed by a 2021 profit of $2.41 per share. Share repurchases have been suspended, and the dividend payout remains intact. This week, Wells Fargo raised their price target on MPC to 51.
Oil prices and stock prices will invariably experience another correction soon, after the huge March-through-June run-up. The best approaches right now would be to either buy MPC for a quick trade; plan to buy low during the next market correction; or use a stop-loss order on your existing position, raising the stop price as the stock continues to rise in the coming days. Buy.
MKS Instruments (MKSI 114.61 – yield 0.7%) is a 60-year-old global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for their customers. Their primary served markets include the semiconductor, industrial technologies, life and health sciences, research and defense. MKS offers the largest breadth of products and services in their market, with 2200 patents and a sales presence in 100 countries. Investors can tune in to webcasts from industry conferences dated May 26, May 27 and June 8. MKS Instruments was featured in the February 19 issue of Cabot Undervalued Stocks Advisor.
MKSI is an undervalued, small-cap growth stock. Analysts’ consensus estimates point toward EPS growth of 12% and 38% in 2020 and 2021. MKSI broke out of a trading range this month and is now racing toward this year’s high of 120. Traders should consider exiting near 120. Buy-and-hold growth investors should be comfortable holding the stock longer term. Add MKSI to the list of growth stocks that you might buy low during the next market pullback. Hold.
NV5 Global (NVEE 52.86) is a leading provider of professional and technical engineering and consulting solutions for public and private sector clients in the infrastructure, construction, real estate, and environmental markets. At this point, profits are expected to show no growth in 2020, and to then grow 29% in 2021. The 2020 P/E is 16.9. Those are not bad numbers. However, the continued downward trend concerns me. I’m going to remove the stock from the portfolio very soon, but since I don’t want to suddenly move the market with a Sell recommendation, I’m saying “Hold” so that those of you who prefer more active portfolio management can make timely sell decisions, in advance of the other investors who will wait until I say “Sell”. NVEE is on an uptrend, with some price resistance at 57-58. Hold.
Quanta Services (PWR 43.31 – yield 0.5%) is a leading specialty infrastructure solutions provider serving the utility, energy and communication industries. Their infrastructure projects have meaningful exposure to highly predictable, largely non-discretionary spending across multiple end-markets, including 65% of revenue coming from regulated utility customers. The company achieved record annual revenues, operating income and backlog in 2019, and is pursuing a multi-year goal of increasing margins. Dividend payouts and share repurchase activity have continued uninterrupted during the pandemic. Investors can tune in to webcasts as Quanta’s management speaks at four meetings and industry conferences between May 26 – June 9. You may also view Quanta’s comprehensive May/June Investor Presentation. Quanta Services was featured in the December monthly issue of Cabot Undervalued Stocks Advisor.
PWR is an undervalued, mid-cap growth stock. Full-year earnings estimates declined during the pandemic due to business disruptions. Analysts expect EPS to fall 5% in 2020 and then rise 21% in 2021. The 2020 P/E is 13.5. PWR is approaching its November 2019 peak near 44. Traders should exit soon. Everybody else should hold PWR and consider buying more shares during the next market pullback, below 38. Hold.
Tyson Foods (TSN 68.67 – yield 2.4%) is the largest U.S. food company, with operations in 20 countries, and a recognized leader in protein with leading brands including Tyson, Jimmy Dean, Hillshire Farm, Ball Park, Wright, Aidells, ibp and State Fair. Management is focused on serving the growing global need for protein and fulfilling that need in a sustainable and environmentally conscious manner. The company is expected to deliver record revenues in 2020. Tyson Foods was featured in the January, April and June issues of Cabot Undervalued Stocks Advisor.
Last week, the CEO of U.S. poultry company Pilgrim’s Pride Corp. was among four industry executives indicted by the U.S. Justice Department on price fixing charges. Tyson’s stock fell that day, likely as investors scrambled to learn whether any Tyson executives were caught up in the scandal. Upon learning that no Tyson personnel were named in the indictment, the stock recovered in the next day’s trading, then immediately jumped from the recent trading range toward upside price resistance near 70.
Tyson’s profits are expected to fall 22% in 2020 due to pandemic business disruptions, then rise 43% in 2021. The 2020 P/E is 15.2. Last week, Bernstein raised their price target on TSN to 83. I’m moving TSN from Strong Buy to a Buy recommendation, now that most of the expected near-term run-up has taken place. However, the market remains bullish, so the stock could surprise me and keep rising past 70. Buy.
Universal Electronics (UEIC 49.40) is a manufacturer and world leader of wireless and voice remote control products, software and audio-video accessories for the smart home; with over 400 patents and a strong pipeline of new products in the areas of safety and security, climate control and lighting. Clients include every major electronic and telecommunication company: AT&T, Cox, Dish, Comcast, Samsung, LG, Sony, Liberty, Daikin, Sky and more. The first quarter of 2020 delivered strong gross margins and improved operating margins, even though revenue was affected by pandemic-related business disruptions. UEIC is a volatile, undervalued, micro-cap growth stock, appropriate for risk-tolerant investors and traders. Near-term price action could swing ten points in either direction, depending on momentum in the broader market. UEIC should be on your list of stocks to buy during market corrections. Strong Buy.
Voya Financial (VOYA 53.39 – yield 1.1%) is a U.S. retirement, investment and insurance company serving 13.8 million individual and institutional customers. Voya has $603 billion in total assets under management and administration. Analysts expect EPS to grow 19% and 42% per year in 2020 and 2021, and the 2020 P/E is 12.6. VOYA is a mid-cap aggressive growth stock. The stock could reasonably rise to 55 quite soon; maybe higher. Growth investors should earmark VOYA as a great stock to buy during market corrections. Buy.
Growth & Income Portfolio
Bristol-Myers Squibb Company (BMY 61.43 – yield 2.9%) is a biopharmaceutical company with a mission to discover, develop and deliver innovative medicines that help patients prevail over serious diseases. Bristol-Myers purchased Celgene for $74 billion in November 2019. The merged company markets a long list of pharmaceuticals, including Revlimid, Eliquis and Opdivo, to treat cardiovascular, oncology and immunological diseases. The company expects revenue and profit growth to come from four areas: sales volume increases from current products, development and launch of new medicines, life cycle management and synergies from the Celgene acquisition.
The company will host a virtual three-part investor series on June 22, 25 and 26, during which CEO Giovanni Caforio, M.D. and members of the leadership team will discuss the Company’s strategy, pipeline and business opportunities. The three topics are Early Pipeline and Immuno-Oncology, Hematology, and Immunology and Cardiovascular. The general public is welcome to tune in to the webcasts. Bristol-Myers was featured in the April and June issues of Cabot Undervalued Stocks Advisor.
The company is expected to increase EPS by 32% and 20% in 2020 and 2021, and the 2020 P/E is 9.9. Bristol-Myers’ financial priorities include debt repayment, investment in innovation, share repurchases and annual dividend increases.
BMY is appropriate for growth investors and income investors. The stock is rising toward short-term resistance at 64. There’s additional resistance at its February high of 67. Longer-term, pharmaceutical companies will likely fare better during a recession compared to those in other less essential industries. Strong Buy.
Broadcom (AVGO 317.52 – yield 4.1%) is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. CFO Tom Krause expects to both continue paying the dividend and paying down debt in 2020 (none of which is maturing this year), even under poor economic conditions. Share buybacks and M&A activity are now on the back burner. Broadcom was featured in the December 17 and January issues of Cabot Undervalued Stocks Advisor.
Broadcom reported good second quarter results last week with record free cash flow. The next ex-dividend date is June 23. Full-year profits are expected to grow 1.2% and 10.1% in 2020 and 20212, and the 2020 P/E is 14.7. (I expect these numbers to change in next week’s update, as analysts reassess their projections in the wake of the second quarter earnings release.) AVGO has just retraced its high near 320 where it traded consistently from December 2019 through February 2020. Traders should consider selling, then buying low during the next correction in the broader market. Hold.
Dow Inc. (DOW 45.90 – yield 6.1%) is a commodity chemicals company with manufacturing facilities in 31 countries. Analysts expect full-year EPS of $1.40 and $2.33 in 2020 and 2021, respectively. After repurchasing $125 million of stock during the first quarter, Dow suspended share repurchases during the second quarter as a result of the economic lockdown’s effect on business. The stock’s dividend remains intact. DOW had a tremendous run-up last week. DOW shares tend to be encouraged by rising oil prices, and the dividend yield remains quite attractive. Both of those situations could continue to attract new investors and thus enhance the share price. Buy.
Total S.A. (TOT 44.19 – yield 6.8%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. The company’s success in maintaining low debt levels and a low price-per-barrel of oil have benefited Total during the recent period of global business lockdowns. Total has chosen to maintain their quarterly dividend payout at the year-ago level of 66 Euros, a slight reduction from the more recent 68 Euros. The company is reducing capital expenditures and operating expenses and considering selling infrastructure assets and/or real estate based on liquidity needs. Debt levels increased during the first quarter, but do not reflect a problematic situation. Total SA was featured in the May issue of Cabot Undervalued Stocks Advisor.
I’m displeased with the earnings outlook, which analysts have continually lowered since mid-May, now expecting EPS of $0.74 and $2.07 in 2020 and 2021. The stock is rising toward price resistance at 47. I will likely remove the stock from the portfolio quite soon. TOT remains a good investment for buy-and-hold investors and dividend investors. Remember that global economies have greatly suffered, and that a global recession could eventually impact Total’s dividend payout. Hold.
Buy Low Opportunities Portfolio
Alexion Pharmaceuticals (ALXN 119.74) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Current marketable drugs include Soliris, Ultomiris, Strensiq and Kanuma. All first quarter sales levels of these drugs surpassed year-ago numbers. The company is focused on three goals: converting patients from Soliris to Ultomiris, expanding indications for Ultomiris, and diversifying their portfolio to fuel continued long-term profit and revenue growth. Alexion is in the midst of a $1.41 billion acquisition of Portola Pharmaceuticals (PTLA). Portola markets a treatment that reverses the effects of blood thinning drugs Eliquis and Xarelto in cases of life-threatening or uncontrolled bleeding. Investors may listen to management’s June 9 presentation at the Global Goldman Sachs Healthcare Conference. Analysts expect EPS to increase 4% and 7% in 2020 and 2021, and the 2020 P/E is 11.0.
Recent news that Alexion settled a patent dispute with Amgen (AMGN) served to launch the share price upward. The price chart remains bullish. There’s no strong level of upside price resistance until the stock reaches 140, although it could certainly stop rising at any time. The new support level will likely be 115. I have a Hold recommendation on the stock, due to the slow earnings growth projections (it’s still a great company), and I intend to Retire ALXN from the Buy Low Opportunities Portfolio after the current run-up appears to cease. Hold.
Baker Hughes Company (BKR 19.06 – yield 3.8%) offers products, services and digital solutions to the international oil and gas community. The decline in the weekly rig count is slowing and shares of oilfield service companies continue to rise, encouraged by reopening economies, rising oil prices and rising stock markets. Altacorp raised their price target on BKR to 22.75 this week. I remain concerned about Baker Hughes’ deteriorated earnings outlook, and therefore will remove the stock from the portfolio when the current run-up appears to cease. Energy stocks are volatile, so consider using a stop-loss order on BKR, raising it every few days during this run-up. Hold.
General Motors (GM 30.68) remains committed to producing electric and autonomous vehicles. GM continues to increase North American auto production as we move away from COVID-19 lockdowns. GM was featured in the December 31, 2019 issue and the February issue of Cabot Undervalued Stocks Advisor. Wall Street is projecting EPS of $0.87 and $3.82 in 2020 and 2021. GM continues to rise, with a maximum near-term upside of about 34. I’m moving GM from Strong Buy to a Hold recommendation. We’re near a short-term top; there’s more downside risk now that the stock is no longer paying a dividend. Hold.
Mercury General Group (MCY 45.73 – yield 5.5%) – I’m removing MCY from the portfolio today with a Sell recommendation. I’m concerned that the cost of the recent nationwide riots will greatly impact property & casualty insurance companies’ balance sheets, casting a pall over their stocks for a while. My suggestion is that you use a stop-loss order to protect your downside, thereby allowing the stock to continue to rise if momentum remains strong. The ex-dividend date is today, June 10. If you sell MCY today or thereafter, you will still receive the normal dividend payment on June 25. Sell.
Special Situation AND MOVIE STAR PORTFOLIO
Adobe Systems (ADBE 397.78) is a software company that’s changing the world as an innovative leader in digital media and digital marketing. ADBE is a large-cap growth stock. Earnings estimates have barely changed in recent months reflecting the consistency provided by the steady income associated with a subscription-based business. Management is focused on improving operating margins. Adobe is expected to report second quarter results of $2.33 EPS and $3.2 billion revenue on the afternoon of June 11. Investors should expect management to discuss temporary revenue delays as customers recently adjusted budgets during the pandemic. Analysts expect full-year EPS to increase by 24% and 14% in 2020 and 2021, respectively. The 2020 P/E is 41.
In recent days, UBS raised their price target on ADBE to 450, Credit Suisse to 415 and Jefferies to 450. Adobe surpassed its February all-time high recently, and has continued climbing. I won’t be buying shares again until the next major pullback. Hold.
Amazon.com’s (AMZN 2,524.06) innovations and forays into new industries are seriously disrupting established global businesses, including freight companies, retailers, entertainment and technology companies. The company is experiencing growth in Amazon Web Services (AWS), Prime membership, Prime Video viewer hours, revenue and free cash flow. Amazon is reportedly in talks to invest $2 billion in Bharti Airtel, an Indian mobile operator. Amazon.com was featured in the April issue of Cabot Undervalued Stocks Advisor.
Amazon plans to spend all second quarter profit – approximately $4 billion – on COVID-related expenses, including new hires and wage increases. Analysts expect full-year earnings per share to fall from $23.01 in 2019 to $18.86 in 2020, then rise 99% to $37.54 in 2021. However, economic data on consumer shopping habits indicates a tremendous ongoing surge in ecommerce spending. Therefore, I expect consensus earnings estimates to be revised upward, with Amazon likely delivering an upside second quarter earnings surprise.
On June 8, Baird and RBC raised their price targets on AMZN to 2,750 and 3,300, respectively. AMZN continues to reach new all-time highs. If the broader market weakens, AMZN could easily pull back to 2,300 (or further). Everybody should buy AMZN during market pullbacks. Buy.
Equitable Holdings (EQH 23.05 – yield 3.0%) owns two principal franchises: Equitable Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm. Equitable has a 161-year history, including a recently concluded 30-year period of being majority-owned by AXA, the global insurance company. Investors may listen to management’s presentation at the June 9 Morgan Stanley Virtual U.S. Financials Conference. Equitable Holdings was featured in the February and June issues of Cabot Undervalued Stocks Advisor.
Profits are expected to fall 13% in 2020, then rise 17% in 2021. Equitable shares are undervalued, with a 2020 P/E of 5.5. EQH is appropriate for dividend investors, growth investors and traders. There’s price resistance at 27, where the stock last traded in February. Strong Buy.
Netflix (NFLX 419.49) is the world’s leading streaming entertainment service with over 167 million paid memberships in over 190 countries. Viewers can enjoy unlimited access to TV series, documentaries and feature films across a wide variety of genres and languages, all without commercial interruptions. The company is experiencing rapid international subscription growth and creating original foreign language content for international markets. Netflix was featured in the January 22 issue of Cabot Undervalued Stocks Advisor.
The first quarter earnings release featured outstanding subscriber growth and a rising operating margin that’s enhancing earnings per share. Wall Street expects full-year profits to grow 56% and 33% in 2020 and 2021. NFLX is a high-PE growth stock. The stock has traded between 400-460 since mid-April. Buy.
NVIDIA (NVDA 352.20 – yield 0.2%) is the pioneer and leading designer of graphics processing unit (GPU)-accelerated computing, which then ignited modern artificial intelligence (AI). Target markets include gaming, professional visualization, data center, and autonomous driving. In April, NVIDIA completed the $6.9 billion acquisition of Mellanox Technologies Ltd., an early innovator in high-performance interconnect technology, routinely used in supercomputers and hyperscale data centers. NVIDIA’s data center business now represents about 50% of total revenues. NVIDIA is participating in six investment conferences, and also hosting their annual shareholder meeting, between May 27 – June 16. Investors may listen to any of the corresponding webcasts. NVIDIA was featured in the March and May issues of Cabot Undervalued Stocks Advisor.
NVDA is a high-PE, aggressive growth stock. Wall Street expects EPS to grow 40% and 21.5% in fiscal 2021 and 2022 (January year-end). Gross margins and revenue are also expected to increase this year. The company has $7 billion remaining in their repurchase authorization. The stock continues to reach new all-time highs. Add to NVDA on pullbacks. Hold.
VanEck Vectors Oil Refiners ETF (CRAK 24.50) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Oil Refiners Index (MVCRAKTR). The International Maritime Organization is mandating the use of either scrubbers or low-sulfur diesel fuels for the world’s 39,000 ships and tankers, beginning in January 2020. The purpose of the mandate is to minimize sulfur oxide (SOx) emissions into the atmosphere, and the mandate is nicknamed IMO 2020. Oil refining companies are expected to profit from the demand for low-sulfur diesel fuel. Read more here: IMO 2020: The Big Shipping Shake-Up.
As global economies continue reopening in the wake of the COVID-19 business lockdowns and quarantines, demand for energy is rising, as are oil prices and energy-related stocks. CRAK shares continue to rise, with price resistance at about 25-26. Buy.
Strong Buy and Buy – This stock meets most of my fundamental investment criteria.
Hold – Do not add to your position in this stock until a particular issue is resolved.
Retired – This stock has been removed from the portfolio for a specific reason,
yet remains an attractive holding for long-term investors who would rather minimize portfolio turnover.
Sell – This stock has a problem that increases portfolio risk. Sell it.